As president of the Footwear Distributors and Retailers of America, Matt Priest has had his hands and his inbox full since rumblings of a trade war with China began to shake the footwear community last year. Those tensions have resulted in new tariffs on $250 billion in Chinese goods, with threats of more to come. “I think 2018 will be defined as the year of uncertainty in the trade space,” he told Sourcing Journal.
“It was just under a year ago that we got all of our members ramped up and sent a letter to the president,” said Priest. He credits that effort in spring of 2018 with helping keep footwear off of the list of Chinese imports being subjected to higher tariffs—and so far it’s stuck, but who knows for how long. In the letter, FDRA’s 82 members sought to remind President Trump that duties paid on footwear imports are already higher than the 1.5 percent average on other imports, averaging 12 percent and ranging well above that. “Duties are just taxes paid by Americans,” Priest said. “An additional increase would be catastrophic.”
One of Priest’s issues with the way things have played out is that getting tough on China ends up penalizing American brands—and those potentially de-incentivizing cost increases are passed along to consumers. “It’s clear to all of us that the administration wants to change China’s behavior as it relates to tech transfers, forced ownership and intellectual property protection or the lack thereof,” Priest said. “But how do additional tariffs on American consumers change that?”
The yet-unanswered question has sent ripples of anxiety throughout the industry as the threat of higher tariffs looms. But Priest is optimistic that “footwear can continue to dodge the bullet.”
“The administration is in search of an outcome that’s positive—to find something that can be enforced… and that shows some movement by the Chinese toward their point of view,” Priest offered. “I think they feel like they have leverage now, or more than they’ve had in the past, because the Chinese economy is starting to falter and they’re starting to see some of the pain that’s come not just from the trade war but from some structural economic issues.”
The wavering Chinese economy and the increased cost of manufacturing have been a brewing source of consternation and unease. “Our members have always been looking to move away from China, due to a lot of variables that had nothing to do with trade policy,” Priest said. In recent years, the volume of American footwear produced in China has dropped from 93 percent to below 70 percent, he said.
The industry has for some time recognized the need to diversify sourcing to avoid a dangerous reliance on China—the scenario that’s playing out now. “For our members in particular, 90 percent of our imports come from just three countries,” Priest said. They are China, Vietnam and Indonesia. “We’ve been long thinking about what we can do to diversify from those three—particularly China.” He noted that a quiet exodus from China has been taking place since before the trade war began.
Even if a palatable resolution is reached in the coming weeks or months, Priest believes the shift away from Chinese manufacturing will persist. “No matter what happens, whether we strike a deal or not, the relationship is forever changed,” he said. “We can no longer view China as this sure-footed sourcing opportunity because any administration could come along and throw down the gauntlet when it comes to trade policy, and what are you left with? You’re left with the need, again, to scramble and look elsewhere.”
That’s a risk many brands would like to avoid. And it spells more good news for Vietnam, “the biggest recipient of market share that China has shed over the past decade.”
“From a quality perspective, Vietnam is top-notch,” Priest asserted. “At one point it was dominant in athletic and sports footwear, now you can source any type of shoe from Vietnam and the quality will be very similar [to China],” he said, explaining that many Vietnamese factories are owned by manufacturers in China and Taiwan.
But if there is a “mad rush” to move production to Vietnam, he said, prices will likely go up. “It’s just like buying an airline ticket, if you buy at the last minute it’s more expensive.”
Vietnam is not the only country vying to gain a bigger share of US footwear manufacturing. Indonesia, Cambodia and Bangladesh are all clamoring for more business, he said.
And those costs will ultimately reach the consumer. “We’ve been tracking the average import price of footwear on top of the consumer price index for years, and there’s an unmistakable correlation between the rising or declining cost of footwear and…the cost of a pair of shoes at retail.”
High-end brands may weather a tariff storm more ably than brands at mass retail. “The way the tariff structure is organized is that, in general, the higher the value of the shoe, the lower the duty rate,” he explained. “If I get some Ferragamo dress shoes…the duty rate is only 8.5 percent. If I get a pair of rubber shoes from China…the rate could peak at 70 percent. So an average American family is paying a higher duty rate on their footwear than those buying luxury brands.”
And should duties continue to rise, cheaper brands sold at big box stores “just can’t afford to pass on increases, as their customer base is least likely to be able to afford it.”
Despite the uncertainties of tariffs and sourcing, Priest does not think his members will pull back from innovation that has successfully driven volume. Consumers want “more e-commerce, more customization, and more product, quicker.”
The victors of 2019 will be brands who are “innovative, customizable, [and] inclusive,” he said. Moreover, the “it” brands will be those who can define sustainable practices for the industry. That could be in material innovations or in their factory processes. “There are some things that are just not sustainable by their very nature; leather comes to mind. Sourcing a product that sits on a container ship to travel halfway across the world—what’s the carbon footprint for that?”
Priest characterizes the current landscape as the Wild West, ripe for more industry pioneers like AllBirds, whose wool and eucalyptus fiber shoes have helped drive consumer engagement to the sustainability story.
That story could be stymied by trade, Priest admitted. “If the economy goes south and things tighten up, sustainability won’t be a part of the equation. It will be about which shoes sell.”
Still, Priest insists that the trend toward sustainable and transparent practices is mostly consumer-driven. “We live in a very inauthentic age,” he explained. “The irony of that is that you have a consumer base looking for authenticity and transparency.”
There’s a desire to “cut through the promotional ads and the photoshopped models to figure out where [brands] sourced these shoes from and what materials went into them,” he asserted. “We’re all bombarded with information constantly, and now we expect a line of sight into how things are made and sourced.”
In a world that’s more connected than ever, it’s not just superpowers who weigh in on industry issues: consumers are lining up for a peek behind the curtain.